Saturday, September 20, 2008

Corruption on Wall Street

Wall Street is massively corrupt and criminal.

Fraud

Wall Street has scammed and defrauded countries around the world into buying their ABCP (Asset Backed Commercial Papers) crap. These foreign companies, have and will lose even more money. Canada did not lose nearly as much as China or Russia. Nevertheless, Canadians have lost billions to Wall Street. According to CBC, Canadian banks bought $32 Billiion of ABCP. Canadian banks do not want the bad PR and therefore, they have been hiding this loss with creative accounting. Read how U.S. defrauded billions from the world.

Insider Trading

Insider trading, which is illegal, is pervasive on Wall Street. Few people understand how insider trading works and how it steals from the average, retail investor.

Fannie Mae and Freddie Mac stock went up before the announcement of the Fed bailout. The only explanation is that the Investment bankers, who brokered the bailout, were doing insider trading. There are many backdoor deals where stocks would jump during after-hours. Again, this implies insider trading.

Because of all the insider trading going on after-hours, some traders think it is too risky to hold stocks past one day. Some of them now focus on day trading and make sure they sell all holdings before the day ends.

Pump and dump

Pump and dump, which is also illegal, is pervasive on Wall Street. This involves pumping up a company, such as telling potential investors how great the company is and how revenue and profit are expected to grow. When the investors buy the company's stock, the pumpers then dump their own stock, making a profit. The executives of Biovail and Nortel were accused of Pumping and Dumping.

Dump and Scare

Wall Street has been Pumping and Dumping for decades. They also do the reverse, which is what we call, Dump and Scare. They do Naked Shorts and then spread negative rumours to drive down the share price. This is illegal and happened to UAL. Somebody shorted UAL and then somehow got the press to publish a report that UAL was thinking of filing for bankruptcy. However, this report was 7 years old. Nevertheless, this scared many shareholders into selling. Even though the exchange found out about the false report, they didn’t back-order the trades. Consequently, the guys who shorted made a fortune. The government believes that the Dumping and Scaring was the cause of the plummeting stock price of many firms during the financial market crisis. This is one of the reasons that the government halted short selling.

Stealing from You

When Wall Street does insider trading, pumping and dumping or dump and scare, they are essentially stealing capital gains from other shareholders/investors. These other shareholders include mutual or pension funds. If you own funds or stocks, you have likely been one of the millions of victims.

Moral Hazard

Between the Bear Stearns bailout and Lehman Brothers bankruptcy, the Fed provided low discount rates to encourage lending between the firms. The firms knew that they had toxic balance sheets. Instead of lending, the firms used the money and took hugely risky gambles to recoup their balance sheets. They didn't fear bankruptcy because they saw how Bear Stearns got bailed out. They ran up oil and commodities. When these dropped, they shorted their own firm’s shares.

Mafia Comparison

The Gambino family was one of the largest Mafia families in U.S. history. They generated approximately $500 million in revenue. Wall Street makes the Mafia look like boy scouts.

When you see mansions in the Hamptons or villas in the Caribbean, many of them are paid for with money stolen from you.

Government

The US government controls the economic numbers: Inflation (CPI), Housing, Unemployment, etc. However, they have motivation to make them look better than what they really are, and they are able to do this by including or excluding different factors and by doing creative accounting. It is already a fact that the US and Canada uses different formulae to calculate Unemployment. Consequently, the street doesn’t believe the US numbers, and think that they are much worst.

Wall Street has become the world's largest Casino.

Incompetence

Bernie Madoff's fund was the largest ponzi scheme in history. Yet, the SEC did not even detect this. Harry Markopolos warned SEC repeatedly about Madoff, but to no avail. Rightfully so, he gives harsh criticism of SEC's incompetence.

Imagine the number of Wall Street crooks that the SEC would catch if the SEC was competent.

When the police catch 10 drivers speeding on the highway, does that mean that only 10 people were speeding? This is analogous to Wall Street except the highway police are probably doing a much better job than the SEC.

Washington Insider Trading

On 60 Minutes, Jack Abramoff explained how he bribed and corrupted 100 Washington politicians at a time. He explains how representatives of Congress and their staff, who have no business or finance background, were consistently beating the stock market. They were doing insider trading.

This 60 Minutes episode elaborates on this. Senators and representatives of Congress trade with insider information, before laws are enacted, on a regular basis. Consequently, these politicians outperform even corporate insiders. The Senators average 12.3% annual return, whereas the corporate insiders average 7.4% and households average -1.5%, as shown in chart below (source). The game is rigged.

Prosecuting Wall Street...Not

This 60 Minutes episode explains how the government has not prosecuted any executives of Wall Street banks.

A former Vice President of Countrywide states that people at Countrywide belong behind bars and would give their names to a grand jury, if asked. She explains how Countrywide was committing pervasive fraud and the executives, such as CEO Angelo Mozilo, broke the Sarbanes-Oxley law, which is punishable by prison time. However, the government does not investigate.

A former Senior Vice President at Citigroup explained how 60 percent of the mortgages were defective. He informed his superiors. Despite this, CEO Charles Prince signed the Sarbanes-Oxley certification, effectively defrauding investors. Citigroup's comptroller told CEO Vikrim Pandit that it questioned the value of its mortgage securities and found internal controls to be deeply flawed. Nevertheless, Pandit and CFO Gary Crittenden signed the Sarbanes-Oxley, certifying to investors that everything is okay.

60 Minutes said: "If you had said two years ago that nobody was gonna be prosecuted on Wall Street for the subprime mortgage scandal, I think people would think, "It's not possible.""

It's possible.

The police have arrested a lot of people on Wall Street, but only protesters. No executives have been arrested.

Inside Job - This won the Oscar for Best Documentary. Producer Charles Ferguson began his Academy Award acceptance speech by reminding us that three years after our worst financial meltdown "not a single financial executive has gone to jail." This documentary is a must-see, as it clearly explains how Wall Street have been committing fraud and corruption. Here is a news interview of the producer:

Raj Rajaratnam, billion hedge fund manager, sentenced to 11 years for insider trading. How much of his $1.8 billion was made legally and ethically?

Former Goldman Sachs board member, Rajat Gupta, surrenders to criminal charges related to massive hedge fund insider trading. How many other board members from other companies do illegal insider trading?